The economy has a complex relationship with the environment. It provides the raw materials and energy for the production of goods and services that support people's lifestyles, but the environment also sustains damage through the activities of households and businesses. The systematic summary of economic activity provided by the national accounts for a country are sometimes criticised for including the value of goods and services produced and the income generated through the use of environmental assets, but not reflecting the economic cost of depleting environmental assets or the damage that arises from economic activity. Thus,

... a country could exhaust its mineral resources, cut down its forests, erode its soil, pollute its aquifers, and hunt its wildlife to extinction, but measured income would not be affected as these assets disappeared (Repetto et al. 1989).

This anomaly is well recognised by national accountants. In the article Is life in Australia getting better? Chapter 29 National Accounts, progress is adopted as the primary concept. Progress here encompasses more than improvements in the material standard of living or other changes in economic aspects of life, it also includes changes in the social and environmental circumstances.

This section discusses how the environment is currently treated in the Australian national accounts (Australian System of National Accounts, 2002-03 (5204.0)), and gives a broad overview of the work being done by the Australian Bureau of Statistics (ABS) to extend the core national accounts in what could be called a satellite account for the environment.

Environmental assets in the Australian national accounts

For an asset to be included in the Australian national accounts it must have an identifiable owner, and the owner must be able to derive an economic benefit from holding or using the asset. Economic environmental assets can include subsoil assets, land, forests, water, and fish stocks in open seas that are under the control of an economic agent (often the government).

Environmental assets such as the atmosphere are outside the scope of economic assets as they do not have an identifiable owner who can derive an economic benefit from their use. This is not to suggest that these assets are of no value. On the contrary, many environmental assets are essential to life itself. However, even if they fell within the definition of an economic asset, the valuation techniques available to measure such assets tend to be arbitrary and controversial.

The environmental assets in the Australian national and sector balance sheets are land, significant subsoil assets, plantation timber, and native standing timber available for exploitation. Land valuations are available through administrative sources, and net present value techniques (which take into account current production rates, prices, costs, and discount rates) are used to value both subsoil and native forest assets. Plantation standing timber is also considered an environmental asset and plantations are included in the balance sheet as inventories because timber growth is controlled. Water and fish stocks have not been included on the Australian national balance sheet due to a lack of available data.

The Australian national balance sheet recorded $4,190b worth of assets at 30 June 2003, of which $1,622b (39%) were economic environmental assets (table 24.36).

24.36 AUSTRALIA'S TOTAL ASSETS - 30 June

1995

1999

2003

$b

$b

$b

Financial

185

325

486

Buildings and structures

1,024

1,236

1,578

Machinery and equipment

265

303

353

Other produced

110

120

144

Other non-produced

7

Environmental

727

984

1,622

Total assets

2,311

2,969

4,190

Source: Australian System of National Accounts, 2002-03 (5204.0).

While land accounts for 83% of the value of Australia's economic environmental assets, the value of rural land accounts for only 11% of the total value of land (table 24.37). Subsoil assets account for 16% and timber (native and plantation) account for 1% of Australia's economic environmental assets. No values are included for other environmental assets. The value of environmental assets grew strongly during the 1990s, more than doubling between 30 June 1995 and 30 June 2003. Much of this growth was due to rising prices, environmental assets only grew by 6% in chain volume terms, that is, after adjustment for changes in prices during the period.

24.37 AUSTRALIA'S ENVIRONMENTAL ASSETS - 30 June

1995

1999

2003

$b

$b

$b

Rural land

68

105

145

Other land

558

730

1,205

Oil and gas

55

72

124

Other subsoil

38

68

138

Native standing timber

2

2

3

Plantation standing timber

6

7

7

Total assets

727

984

1,622

Source: Australian System of National Accounts, 2002-03 (5204.0).

Measuring depletion

Depletion is defined in the international System of National Accounts 1993 (SNA93) as the:

... reduction in the value of deposits of subsoil assets as a result of the physical removal and using up of the assets, ... the depletion of water resources, and the depletion of natural forests, fish stocks in the open seas and other non-cultivated biological resources as a result of harvesting, forest clearance, or other use (SNA93, 12.29 and 12.30).

Depletion in an economic sense results because the value of the resource stock has been lowered through its use in a productive activity, and the use has reduced the asset's ability to produce an income stream in the future. In this sense depletion is analogous to depreciation of produced assets whereby the current value of the stock of fixed assets declines through normal use, wear and tear and foreseen obsolescence.

Physical depletion may not necessarily equate to economic depletion in cases where asset values are low or the resource life is long. While the physical dimension of depletion can be fairly readily observed in practice, its value cannot. This is because the mineral or other natural resource product is not what is being valued - rather it is the decline in the value of the mineral asset below the ground or the standing timber in the forest. Generally, one has to resort to capital theory to undertake this valuation. More detail of the theory and calculations used by the ABS are presented in Environment by Numbers: Selected Articles on Australia's Environment, 2003 (4617.0).

Subsoil assets

The depletion of minerals and fossil fuels in any one year is the change in the value of the asset between the beginning and end of the year arising purely from the extraction of these natural resources. A discovery occurs when previously unknown stocks of minerals are found and delineated. In the national accounts the value of a new discovery in itself is not considered as production or income because it is a gift of nature. Graph 24.38 shows that depletions are increasing at a relatively constant rate, whereas discoveries are erratic. The end result is that in some years more subsoil resources are found than are depleted, while in other years the reverse is true and in some years depletions and discoveries are more or less equal in value.

Land

If land is used sustainably, it has an infinite life and therefore no adjustment for depletion is required. However, where land is being degraded due to economic activity, an adjustment to income for land degradation is applicable. In the context of economic depletion used here, land degradation represents the year-to-year decline in the capital value of land resulting from economic activity (after deducting price rises due to inflation).

Changes in the value of agricultural land can be determined from data on market values or land rates data. However, data for land values are affected by a host of factors other than changes in productive capacity from the impact of land degradation, including inflation, technological advances and changes in land use due to re-zoning, subdivision and 'lifestyle' considerations (Roberts 1997).

Two recent national studies used different approaches to measuring economic losses due to land degradation.

Kemp and Connell (2001) used a farm survey to estimate the extent of land degradation on farms. Combining data from the survey with land value data, regression techniques were used to estimate that the difference in the capital value of farms with and without degradation was approximately $14.2b in 1999. This represents the total accumulated value of losses in land value due to degradation.

The National Land and Water Resources Audit (NLWRA 2002) used models to estimate the 'yield gap', that is, the difference between profits with and without soil degradation. Lost profit at full equity due to salinity, sodicity and acidity was estimated as $2.6b in 1996-97.

The ABS has used the data from these studies to produce estimates of the effect of land degradation on the value of land and the lost profits from agricultural production. The results of this are presented in graph 24.39.

Forest assets

Forests are renewable biological resources. In the national balance sheet, forests are depicted as two types: old growth native forests and plantations. The valuation of the depletion of renewable assets presents a different set of issues to valuation of non-renewable assets as it may be possible to replace (over time) the part of the asset that is used in the current period. Where a forest is harvested sustainably, no depletion adjustment is required.

Estimates for depletion of native forests are not available. However, given the value of native forests on the national balance sheet is $3b compared with $262b for subsoil assets, it is expected that depletion will be relatively insignificant. This is premised on a narrow economic view that does not account for damage to intrinsic non-monetary values such as ecosystem services, biodiversity and aesthetic/recreational values.

Adjusting the Australian national accounts

There is currently an asymmetry in the national accounts between the treatment of produced assets such as buildings, and plant and natural (non-produced) assets. Depreciation of produced assets (termed consumption of fixed capital (COFC) in the national accounts) is deducted to derive the various 'net' income measures in the national accounts such as net domestic product (NDP), net operating surplus (NOS), net national income and net saving. No such deduction is made for natural assets when they are used up or degraded as a result of economic activity. The net measures thus fall short of being sustainable concepts of income, although they are superior to the various 'gross' measures in the Australian national accounts in this respect.

The experimental estimates derived for the value of depletions and discoveries of subsoil assets and the degradation of agricultural land are indicative of adjustments that could be made to the national accounts in the context of a satellite account and are illustrated in table 24.40. Depletion adjustments unambiguously lower the net values. If the value of discoveries is included in income in place of the value of mineral exploration, the net effect of that adjustment can be positive or negative.

24.40 PRODUCTION AND CAPITAL INCOME ADJUSTED FOR DEPLETION AND ADDITIONS

1996-97

1999-00

2002-03

$m

$m

$m

Subsoil depletion

1,944

2,140

3,858

Land degradation

295

305

337

less

Subsoil additions

739

2,751

3,858

plus

Cost of mineral exploration

2,001

1,400

1,727

less

COFC on mineral exploration

1,248

1,448

1,614

equals

Net depletion adjustment

2,253

-354

450

GDP

529,886

628,037

755,252

less

Consumption of fixed capital

80,330

98,075

121,610

equals

NDP

449,556

529,962

631,642

less

Net depletion adjustment

2,253

-354

450

equals

Depletion adjusted NDP

447,303

530,316

631,192

GOS and GMI(a)

210,158

250,694

302,017

less

Consumption of fixed capital

80,330

98,075

121,610

equals

NOS

129,828

152,619

180,407

less

Net depletion adjustment

2,253

-354

450

equals

Depletion adjusted NOS

127,575

152,973

179,957

Net saving

19,646

21,705

23,178

less

Net depletion adjustment

2,253

-354

450

Depletion adjusted saving

17,393

22,059

22,728

(a) Gross operating surplus and gross mixed income.

Source: ABS data available on request, Australian National Accounts.

The net saving levels are changed by the same amount as for NOS, but the nation's net lending position is left unchanged.

Adjusting the Australian national accounts for depletion and additions of subsoil assets also affects growth rates, which may increase or decrease. As table 24.41 shows, the adjustments have the biggest impact on both NDP and NOS in 1996-97, due to the low value of subsoil asset additions in 1996-97 compared with 1995-96.

24.41 CHANGES IN PRODUCTION AND CAPITAL INCOME GROWTH AFTER ADJUSTMENT FOR DEPLETION AND ADDITIONS